Rajasthan And Chhattisgarh Undo Pension Reforms; Why It Can Lead To A Bigger Fiscal Mess For The Country

He who loses all hope in life and is gripped by suicidal tendencies doesn’t think about his responsibilities. The Congress has probably reached that dangerous state of mind, and so they have created the most disturbing precedent in India’s three-decade-old fiscal reforms initiatives.

In a recent decision, Congress-ruled Rajasthan and Chhattisgarh reintroduced the old (defined benefit) pension scheme with retrospective effect from 2004, when the new (defined contribution-based) pension scheme (NPS) was launched.

The impact is similar to those Rs 134,000 crore worth of‘ oil bonds issued by the United Progressive Alliance (UPA) government. The bonds created off-balance-sheet debt, helping the government to reach the fiscal deficit mitigation targets and keep the retail price of auto fuel low in the immediate term. The next generation shouldered the repayment burden.

Removal of fiscal commitment (14 per cent of employee salary) to NPS will improve state finances balance sheets in the short term and will probably offer them some spare cash to burn. State government employees will be happy. Their salaries were increased in the past keeping in mind a 10 per cent contribution to NPS. Now they will be left with that extra cash.

The stressed state economies will face a heavier fiscal burden after a decade when the employees will begin to retire. There will be no way to limit this stress. The pension — linked with pay commission awards and dearness allowances — will keep rising with time.

Rajasthan now pays 56 per cent (41 per cent for Chhattisgarh) of its revenue to pay salaries and pensions of 5.5 lakh employees. As in fiscal year '21, the state was ranked among the most leveraged by India Ratings. The income source from oil will start drying up in a decade.

Six per cent of the Rajasthani population, comprising employees and their families, will go home laughing. The rest of the population may be offered some crumbs. The state will have less fiscal space for development expenditure, which is crucial for sustainable growth. Chhattisgarh’s problems will start the moment their earnings from coal start stagnating.

Though theoretically the NPS offers higher returns, the majority of India’s highly entitled 2.5 crore government employees (Asian Development Bank policy brief) always felt for the old pension scheme. Both Aam Aadmi Party (AAP) and Samajwadi Party (SP) raised the issue during recent elections in Punjab and Uttar Pradesh.

AAP is responsible for popularising the regressive ‘free electricity’ agenda in India. They are now offering 300 units of free electricity — which is almost enough for a middle-class family with one air-conditioner — in Punjab, ignoring the precarious condition of state finances.

But what AAP couldn’t or didn’t do, Congress did. The political messaging was clear from Priyanka Gandhi Vadra’s statement. “Congress is committed to the well being of government employees,” she said on Twitter.

Vadra is the general secretary of the party, but more than that she is part of the family that practically owns the brand.

It is questionable if the card will help improve the Congress’s overall poll prospects. (Samajwadi Party played the same card during the recent assembly election in Uttar Pradesh without much result.) But they surely opened the floodgates for wider damage to the economy.

Demands for restoring the old pension scheme are audible from Punjab, Tamil Nadu, Himachal Pradesh, and even Gujarat. Rest assured, the decibel levels will rise as the election season gets nearer.

There is little economic merit behind such demands. Himachal Pradesh is the second-most financially leveraged state (in terms of both debt-GSDP and outstanding liability to GSDP) after Nagaland. Same states that once failed to deposit NPS contributions in time are now showing interest in this easy way to glory.

There are many negative impacts of this trend. The rate of return from a fund depends both on the market rate of return and the temporal growth of contributions. It means if more states switch to the old pension scheme, the rate of return from NPS will suffer, thereby making an economic case for the further switch.

Right now, the optics of reforms are seriously hurt. If more non-Bharatiya Janata Party (BJP) states go back to the old system, BJP-ruled states may be forced to follow suit to remain competitive. And that will not only be the end of pension reforms but a serious blow to long-term fiscal stability of the nation and its capacity-building initiative.

According to a 2019 publication by Carnegie, “Despite the talk of India’s overbearing government, a closer look reveals that the state is actually highly undermanned. Compared to its G20 peers, India has the smallest number of bureaucrats per capita. When it comes to the state’s core sovereign functions—revenue collection, public goods provision, public order, and justice—the Indian story is one of scarcity rather than surplus.”

This coupled with severe bureaucratisation made the delivery of services by the government too sloth. “Thanks to this mismatch of personnel and paperwork, the processes that ordinary citizens endure to interact with the state are nothing short of Kakfaesque,” the article pointed out.

The mismatch is visible in the "annual report on pay and allowances of central government civilian employees" of the Department of Expenditure of the Ministry of Finance. As of March 2018, there were 38.66 lakh sanctioned posts in the central government including Union territories. Close to 18 per cent (6.88 lakh) were vacant.

'India Justice Report 2019' supported by Tata Trusts points out that the recruitment scenario is no better in states. The world’s second-most populous country has 151 police personnel per one lakh people. The police-to-people ratios in BRICS countries like Russia and South Africa are two to three times higher.

Announcement of job quotas for the underprivileged is a common practice across states. The report, which tracked police recruitments, found that only six states have filled those quotas. The rest had wide gaps.

Evidently, fiscal stress is coming in the way of both the state and central governments to increase capacity. The reason is financial. The centre spent 194,591 crore in employee expenses in 2017-18. Approximately 63 per cent went to pay non-gazetted staff.

States have once again found an easy way out to solve the problem by recruiting low-salaried contractual staff (who are outside this pension debate). Gujarat, Maharashtra, Tamil Nadu, Karnataka — name a state and they are there. And since such staff do not have executive capacity, there is no visible improvement in government service either.

In West Bengal (which along with Kerala and Tripura didn’t opt for NPS back in 2004), contractual employment — for salaries anywhere between Rs 8,000 and Rs 25,000 a month — became a rule. This is also the biggest tool for the ruling politicians to build their cadre base.

The bottom line is clear: Switching to the old pension scheme is hogwash. States are already under severe financial stress. Shunning the path of reforms will increase their vulnerability and block future (regular) recruitments and impact the service quality.

Only a privileged section will benefit from this exercise at the compromise of India’s growth aspirations.